Whatever your stage in life, you can take steps towards a better retirement.
No savings or investment product packs more punch than a pension, whatever your age. This is because they come with unparalleled tax advantages.
“If you are paying the highest rate of tax, at 40 per cent, the tax relief on pensions contributions means that for every €100 you put into your pension, it really only costs you €60,” explains Kristen Foran, National Sales Director at Zurich Life.
That’s not all. “Your money grows tax free too, which is very different than the way savings are treated. If you put money into a savings account, you could get hit by DIRT tax (on interest earned), not so with pension savings,” she reveals.
At the end of your pension savings, when you retire, you could get up to €200,000 tax free as well. “So you get a lot of tax benefits,” Foran says.
On top of all that, you get the benefit of compounding. That means that investment returns made stay reinvested over time. The longer you leave your money in the more returns it should generate, and the larger your pension pot should become.
What to do ... in your 20s and 30s
The earlier you start the better. “The advantages of starting your pension young is that you have more time to grow your pension fund and you can usually afford to take a higher investment risk,” explains Foran.
“If you are saving over 30 or 40 years, you’ll see markets go up and down a lot in that time, but ultimately they go up over long periods of time. Therefore, you can afford to weather a lot of storms, and can afford to take more risk, over the long term.”
For some people, their ability to save more has increased since Covid-19 broke1, she points out. “For some who are working from home, it’s not costing them money to commute, they are not going out as much or entertaining. So there may be money available for people who are working and there has never been a better time to put it into a pension. Start small, save a little and get the ball rolling as soon as possible, to start benefiting from that compounding effect.”
With a company pension some employers can match your contributions, so it’s free money
Remember: If your employer offers a pension, take it. “With a company pension some employers can match your contributions, so it’s free money. Your €100 and your employer’s €100 adds up to €200, but it only costs you €60, so grab it with both hands. If it’s coming out of your salary on your payslip the chances are that you’ll never even miss it and, it could be as low as five per cent of your salary. If it’s a percentage of your salary and your salary goes up, your pension contributions do too, yet you may not even notice it.”
What to do ... in your 40s and 50s
“This is the time people start getting interested in pensions. They are starting to wonder when can they retire and exit the ‘rat race’,” says Foran.
If you haven’t contributed to a pension previously it does mean it will cost you more to start at this age but, on the plus side, the chances are you are earning more and are in the higher tax bracket. “You could still also have around 20 years of investing ahead of you, so you still have that longer time horizon. But the key is to get going as quickly as possible and to put in as much as possible.”
If you are 25 and you want to achieve a pension of €2,000 a month at 65, you will need to put away €630 a month, before tax, “though remember, if you are on the higher tax rate you get 40 per cent of that back as tax relief,” she explains.
If you are 45 starting and want to achieve the same pension, you will need to put away €1,255 a month. “It’s a massive jump, though again, you will get 40 per cent of that back in tax relief. But that’s just to get a retirement pension of €2,000 a month. When you consider the state pension is currently €12,900 a year, adding that would bring you up to €37,000 a year, which is around the average industrial wage.”
People think it is guaranteed but already we have seen changes to the pension age
Remember: Changing demographics means the state pension may not be sustainable into the future at its current rate, making providing a retirement income of your own more important than ever.
“Currently for every four people working there is approximately one person retired,” says Foran, “and we pay for the state pension on a pay as you go basis, that is, PRSI from four people employed is paying for a state pension for one person retired. The ESRI predicts that by 2050, that ratio will be closer to two to one, so you’d have to wonder will it change, will it become means tested for example. People think it is guaranteed but already we have seen changes to the pension age raised in a bid to deal with this impeding problem and it became a major issue in the last election.”
What to do ... in your 60s upwards
By this stage those with pensions may have already considered their investment strategy, possibly switching funds from riskier ones with greater growth potential to managed or secure funds that offer more security as they approach retirement. Those looking to boost their pension pot may consider making additional voluntary contributions (AVCs) as it’s not too late at this stage.
Times are changing and the opportunity to work longer than the traditional 65 years of age may appeal to some, but may not always be possible. “Employers are pushing back the retirement age in employment contracts from 65 to 66, 67 or even 70, and while many people may want to work for longer, that assumes your health allows it. On the other hand, you may not want to keep working until your normal retired age but you may have no choice if you do not have the pension savings in place to allow you to retire early,” Foran cautions.
“The key thing about pensions is that they are just a savings vehicle. The more you put in, the more you’ll have and the more options you’ll have.”
Remember: “Your pot may not be as big but the tax reliefs are great,” she says. In your twenties you can get tax relief of up to 40 per cent, on up to 15 per cent of your net relevant earnings. By the time you are over 60, this relief goes up to 40 per cent of your net relevant earnings (subject to a maximum of €115,000 net relevant earnings).
“It means you can put a lot of money into your pension at the end, at a time when you are much closer to getting your hands on your pension pot,” she says. “It’s never too late so, whatever stage in life you are at, talk to an advisor.”
The information in this article does not constitute advice, and advice should always be sought from a qualified professional.
* Household Deposit Transactions, Central Bank of Ireland – Money, Credit and Banking Statistics, August 2020